Looking beyond student loans
The new academic year is underway and with it comes more student borrowing.
Quite how much each student can borrow depends on a variety of factors. Scottish students living in Scotland pay no fees and there are varying levels of fees elsewhere in the UK. Worst off are those students with English roots who in 2014/15 face borrowing:
- Up to £9,000 to cover tuition fees.
- Up to £5,555 to cover living costs away from home (£7,751 if studying in London).
It doesn’t take a mathematics degree to calculate that a three year course could easily leave the newly job-hunting graduate over £40,000 in debt.
Once the course ends, the process of debt repayment begins. The rule for 2014/15 students is that repayment normally starts once earnings exceed £21,000 a year. Repayments are then at the rate of 9% on the excess, so a graduate with an initial salary of, say, £25,000 would pay £360 a year (9% x [£25,000 - £21,000]). That doesn’t sound too bad until you consider:
- The 9% is coming out of income that has already suffered 20% income tax and, probably, 12% national insurance contributions.
- Student loans are not interest-free, but carry inflation-linked interest that varies between RPI and RPI + 3%.
The well-respected Institute for Fiscal Studies recently examined the likely repayment pattern for today’s (English) students and estimated that:
- The average graduate will start working life with debt of over £44,000 (in 2014 prices).
- Nearly 75% of graduates would not repay their debt by the end of 30 years after graduation, at which point the outstanding amount (average about £30,000) would be written off.
If you have children (or grandchildren) at or planning to go to university, those numbers give serious cause for thought. If you want to help out financially, then the obvious courses of action – supplying funds to replace loans or paying off part or all of the debt – may simply be saving the Government money.
As a result, in terms of financial assistance you now need to think beyond the issue of loan repayment. Your aim should focus more on a flexible build up of capital for your graduate (grand)child, so that their student debt becomes less of a deadweight on their life plans. As with so much else involving children, the sooner you start planning, the better…
The information in this article does not constitute advice and should be used for informational purposes only. This content has been provided to Helm Godfrey by Taxbriefs.